Volcker Rule Driving Talent to Hedge Funds: Stern

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Sitting onstage in Washington’s Ronald Reagan Building in July, Lloyd C. Blankfein said Goldman Sachs Group Inc. had stopped using its own money to make bets on the bank’s behalf.
“We shut off that activity,” the chief executive officer told more than 400 people at a lunch organized by the Economic Club of Washington, D.C., slicing the air with his hand. The bank no longer had proprietary traders who “just put on risks that they wanted” and didn’t interact with clients, he said.

If you managed to be late to the Volcker Rule party, you can learn a great deal of what you’d need to know via the revealing contrast between two reasonably detailed accounts, one at Huffington Post by Shahien Nasiripour, the other by Matt Levine at Bloomberg. If you didn’t know better, you’d wonder if they were talking about the same rule.

And so it is done (as we detailed here)... and due to be put in place as of April1st 2014 (rather ironically). The 100-plus-pages of rules and regulations prohibit two activities of banking entities: (i) engaging in proprietary trading; and (ii) owning, sponsoring, or having certain relationships with a hedge fund or private equity fund. But the kicker...

The ink on the final Volcker Rule has not dried yet, and already the TBTF armies of lawyers have found all the loopholes in the rule they need to continue prop trading as if nothing has changed. Enter Goldman Sachs which as the WSJ reported, is raising a new fund, to which it will contribute 20% in capital, which will make investments in commercial real estate-backed loans including office buildings, hotels, and shopping centers.

Royal Bank of Canada is considering investing as much as US$1 billion in a hedge fund spun off from its U.S. proprietary-trading business, according to two people with knowledge of the matter.
The new firm will be called Taursa Capital Partners and open by the end of the year, said the people, who asked not to be identified because the plans are private and subject to regulatory approval.

Wall Street’s biggest banks will face curbs on some trading and chief executive officers won’t be personally responsible for ensuring compliance in the final version of the Volcker rule, U.S. financial regulators’ landmark attempt to rein in Wall Street.

When JP Morgan’s London Whale blew up, one part of the collateral damage was the publication of a detailed Volcker Rule. The Whale was gambling JP Morgan’s money, and wasn’t doing so on behalf of clients — yet somehow his actions were Volcker-compliant. And when the blow-up revealed the absurdity of that particular loophole, the rule went back to the SEC for further refinement.

In a special conference call this evening Jamie Dimon, CEO of JPMorgan disclosed a "trading loss" of at least $2 billion from a failed hedging strategy.
The strategy "morphed over time" and it was "ineffective, poorly monitored, poorly constructed and all of that," said Dimon.
Last month, Dimon he denied there were any problems, most likely hoping they would go away or he could cover them up. Instead, Dimon went to the confessional.